How tax pooling can help you meet your provisional tax payments
Was your provisional tax amount more than you expected this year? Provisional tax is calculated by your previous year’s residual income tax plus 5%. But the provisional tax you’ve paid in the past may not reflect how your business has performed over the current financial year. Plus, if you underpay your tax, this can lead to use of money interest (UOMI) being charged by Inland Revenue (IRD), and UOMI has increased in recent years.
It can also be challenging for any business to keep a lump sum of cash aside to pay provisional tax on it’s due date, especially if you have cash flow issues or need money on hand.
If paying provisional tax is challenging for you, tax pooling could be the perfect solution. The way it works is that IRD-approved intermediaries collect payments from many taxpayers and put them into a tax pool account with IRD. They then allocate these payments to the taxpayers’ accounts as needed. Once the pool has made the payment to IRD, it is considered to be ‘tax paid’. If you haven’t paid enough tax to meet your provisional tax liability, you can purchase tax payments made by the pool for lower interest rates than those charged by IRD. You can set it up so you can make payments to the pool to help you with provisional tax in future years. There are pros and cons to this and the pros include:
- Flexibility around when you pay provisional tax; you can overpay when you have a bit more money and have some breathing room when things get tight.
- Avoiding penalty charges and use of money interest (UOMI) charges for late payments; the pool will always make time-stamped payments for you.
- If you haven’t paid enough tax to meet your provisional tax liability, tax pools typically charge lower interest rates for purchasing tax payments than those charged by IRD.
- If you’re short on cash, you can dip into your tax pool payments as an emergency line of credit, as long as you top up the money later.
- If you do take money out of the pool, you’ll pay a lower rate of interest than banks charge.
We work closely with Tax Traders so, if you’re finding keeping money aside for provisional tax payments difficult, talk to us today to see if tax pooling is the right fit for you.
To discuss all your account matters please call us on 09 438 1001
